COST OF EXPORTS CAN BE REDUCED THROUGH PROPER PLANNING

SYED ALAMDAR ALI
June 18 - 24, 2007

Exporters and the Cost of Exports: Exports are the lifeblood for the economy of Pakistan and minimizing the cost of inputs is no doubt a significant factor to remain competitive in the export market. The cost of doing business in Pakistan has invariably caused alarm within the government. The SBP and GOP have taken a number of steps in order to support exporters and steps include establishing of export processing zones to grant tax holidays to the exporters establishing projects in certain areas; allowing a number of subsidies such as on account of research and development to the exporters of specific products; allowing export financing on reduced rates to the exporters of specific products. All these steps can certainly yield fruitful results if utilized properly. The instances quoted hereunder indicate why the schemes and policies for the exporters did not yield required results

Existence of the High Degree of Organizational Risk: The term organizational risk has been used here in the context of inability of the entrepreneurs to efficiently and effectively organize the resources available with them. Most of the owners of the export oriented industries do not exactly know what mix of financing is appropriate for them. They are not able to determine and identify their financial needs and sources from where they can fulfill those needs. Most of the time the projects are over-equity financed or over debt-financed. This situation hampers the overall rate of return on the project, also making the cost of the product high.

Lack of Research and Development: Research and development has never been a trend in Pakistan. The industries do not want to improve on the models and methods of production and technology. This inability gradually drags them out of the markets. Even the recent announced research and development subsidies are not producing the required results. The reason being is that most focus is on completing the documentation to claim subsidies with no real effort to promote actual research and development.

Improper Costing of Products: Most of the owners of the industries do not have proper management accounting system that can give them true production costs. Most of the industries are either using cash based costing of their products or financial accounting based costing. This leads to inappropriate pricing of goods making the uncompetitive in the international market.

Lack of Marketing Skills: Expertise in the area of marketing skills is an absolute necessity. Even the exporters with comparatively lower standard and costly products are able to sell their products due to effective marketing. Unfortunately, marketing has not yet been taken seriously in our country. The mind set of the exporters in this regard need to be drastically improved. The focus of the entrepreneurs should be on "Why customers are not buying our products" instead of "Why we cannot sell our products"!

Export Financing Schemes by the Financial Institutions: Many financial institutions are offering their own export financing schemes based upon their risk appetite, the risk of export and the exporter. In case of such financing financial institutions provide finances to exporters before or after the shipment of products to international exporter has been effected. As the financial institutions are commercial institutions therefore such financing is always a bit costly for the exporters. These comparatively high mark-up rates lead to high failure risk for the exporters if the financing is not utilized properly.

Mismanagement of Export Finances: During the era of the present government set-up the Mark-up rates on the Export Refinance Scheme by State Bank of Pakistan touched its lowest ever level of 2.50% p.a., during the period between 2004 to 2006 and even at present the mark-up is at 7.50% only. It is worthy to note that before the present government set-up the mark-up rates were around 12% p.a., while the prevailing mark-up rates were around 17% p.a. One would think that a drop of 10% in the Mark-up on the Export Refinance was a very significant relief why still there was no significant impact on exports. The reason for this was very high speculation in the Real Estate market at that time. As the cost of finance was very low and real estate prices were leaping high in those days therefore most of the exporters invested most of the finances in this sector. This speculative activity on the part of exporters nullified the intended utility to the exporters the authorities intended.

Writer is the Student of Hailey College of Banking and Finance University of Punjab Lahore